The unfairness of government-backed mortgage modifications

The L.A. Times today leads the newspaper with a look at Countrywide's plan to modify up to 395,000 mortgages -- 125,000 in California -- to make the mortgages affordable to buyers who are living in houses they otherwise can't afford. In some cases, those modifications will result in borrowers paying just 2.5% interest on their mortgages.

The Federal government took action last summer to encourage mortgage modifications by putting government guarantees behind the new mortgages, but for whatever reason that program doesn't appear to be attractive enough to banks. Pimco's Paul McCulley accurately described the basic unfairness of that effort months ago:

It runs against the streak of basic fairness in a lot of Americans. You’re going to provide a handout to the fool. The fool is going to be rewarded and I, the taxpayer, will be put at risk at the margin for that handout to the fool. When all I did was exactly what I was supposed to do. Where is the fairness here? It’s a hard question to answer.

I've long believed mortgage modifications should be between the lender and the borrower. The lender should be free to do whatever it wants to maximize the value of the loan. If that means foreclosure, foreclose. If that means a generous workout that is ultimately better for the bank than foreclosure, then work it out.  On the surface, Bank of America says that is what's happening here: it will modify loans if modifciation makes sense for the bank:

Not every borrower will qualify. One reason, said Bank of America executive Steve Bailey, is that the loan owner's expected earnings on a modified loan must exceed what it would expect to recover in foreclosure.

The Federal government, through the FDIC, has announced an aggressive effort to modify loans serviced by IndyMac, the failed bank. But as the indispensable Tanta reported yesterday at Calculated Risk, that ambitious program is off to a slow start. Tanta reports the FDIC originally said it thought it could save up to 40,000 out of 60,000 troubled IndyMac mortgages, but to date has only reached out to 15,000 borrowers, and has modified only 3,500 mortgages.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles.

Comments

[Cal]

356man

lol, It is reduction in principles that got us into this mess. You'll have a full time job if you want to go around pointing out all the spelling and syntax flaws in my posts.

I write more gooder than anyone.

[356man]

Yo Cal: LMOA/ROTF/WTFC--Right, I'll give up my real job so I can spend all my time trying to figure out the basis of arguments that can't be articulated, especially when spellcheck won't save you from the lack of a basic education. Rock on...

[Cal]

356man,

Hey if you want to argue over whether owners of the mortgages aren't allowing cutting principal (which, darn me, I spelled as principle, and I sometimes interchange their, there & they're, your and you're) because of TARP we can do that.

If you want to point out misspelled words, you can do that as well. But I don't think it will make for a very interesting discussion.

[356man]

Hi Cal: I will end the grenade throwing on my end by saying this: You make a lot of arguments that make sense and with which I agree. Please understand that unfortunately the words "principle" and "principal" are actually at the heart of our current and collective dilemma, and that it is important to take the time to distinguish the two. So, truce offered on my end, I have better things (as do you) over which to rant, and I hope we can all move on and survive our current financial landscape.
Rock on--

[shockg]

STOP talking about ending the housing slump. STOP talking about mortgage modifications. STOP talking about principle reductions. The only thing that will stabilize the housing market is lower pricing. These analysts are paid in the high 6 figures and yet no one can figure that out, or maybe they just don't dare speak the truth.

All any of these efforts to fix the "problem" will due is DELAY THE INEVITABLE. Let's say the government steps in with a program that ends all foreclosures and keeps everyone in their homes (impossible, of course, but this is a rhetorical scenario). That STILL doesn't stabilize the market, because no future buyers will ever be able to afford housing at their current levels!

Posted by: Rational Renter | October 24, 2008 at 12:27 PM

Someone sounds bitter they missed the boat. No one can afford homes at the current levels? 3,000 people bought homes in OC last month even with the tight lending standards. You seem awfully threatened by this plan that "won't work"

[It All Happens on the Margin]

sheila:

please don't distract from the source of the meltdown: the US of A supported and enabled big business to lend money to the downtrodden to buy homes. That snowballed into business doing what business does - figuring out how to monetize it and screw the little guy. Uncle Sam backed the whole ponzi scheme up - that means Clinton, Waters, Bush, Dodd, and the rest of 'em.

All in the name of homeownership.

The people making out on this whole deal are the Dems. Crazy, isn't it? The Reps got greedy and tried to make nice with the left by enabling FNMA and FMAC to back up these crazy mortgages knowing their pals make out, Dems get angry at OFHEO for blowing the whistle, it all melts down, complete regime change Nov 4.

Wow.

ps watch for unintended consequences on just about any well-intended program. Universal healthcare -- coming to a hospital near you...

[stimulus4economy]

Modification is good a thing for lenders, home owners and treasury. When judging modification, one should keep in mind that existing home owners have already suffered including complete loss of initial downpayment, subsequent principal payments plus all the mental turmoil over the past months and years.

We can consider an existing home owner taking modification option as a new buyer who bought that property from a foreclosure sale except that it saved lender time and expense involved with foreclosure process. It is better for tax payer as well as otherwise that property will be siting there to be auctioned off for significantly lower than its outstanding loan obligation. For instance, if treasury takes a property from a bank and pays bank 600,000$ assuming thatis the outstanding loan on that property. Now treasury turns around and auctions off that property as per the scheme outlined in the 700B bailout package. In the auction if some one comes forward and bids 550,000$, treasury lost 50K and so is the tax payer. Now why couldn't that 50K be offered to existing buyer and avoid all this process and nonsensical invovlement of so many parties. Not only that, the lender gets his money back, takes small loss, claims tax credit for the loss, home owners get to stay with lesser monthly payment obligations, government need to use less of 700B and therefore more is left of 700B for other programs.

If any thing loan modification must be extended to reset the home values. Please see some thought here

http://stimulus4economy.wordpress.com/

[Crash and Burn]

I think the entry and most of the comments missed an important point here. The Democratic mortgage plan had so many protections in it for the taxpayer and the homeowner that the banks don't want to even use it, especially when there is a chance some mavericky maverick might go around paying FULL value for these loans.

Everything I've seen from the Democrats is that they are going to put forward some token (but mostly ineffective) programs to help homeowners to take some of the political heat off, ensure banks have sufficient funds to make sure the economy functions (with a return of ownership in return for the cash), but aren’t going to buy out these mortgages or pump free money to banks, or keep people who obviously can't afford their house in their homes. These are all of the right things to do for the economy and the taxpayer. On the other side I see the Republicans want to give the bankers as much money as the printing presses can give them, which in addition to being majorly absurd and unfair, will ultimately be ineffective in getting the economy to function properly.

[TC]

So does anyone think it awesome that they are gonna offer these folks 2.5% interest on a 400,000 dollar principle on a home that is worth 200,000 dollars??

[Karen]

Sadly as these loan modifications by Countrywide are suppose to help "homeowners" who live in their home, I already know of a case where a "investor" who doesn't live in the home has gotten a loan modification. The loan modification was for a small property while the owner lives in a lavish $1.2 million dollar home..the system is set up to fail.. as those with a education and a crafty lawyer know how to abuse it..

[Needs a loan mod]

So the bank owned house right next to me just sold for half of what I owe on my house. I owe $855 on a house that is now worth $400k. Do any of you think that it will EVER be worth that again in my lifetime? I don't think so. I am walking away from this house if I don't get a loan mod. If the banks had started offering people loan mods from the beginning, home prices wouldn't be dropping so low so fast.

Are you whiners out there saying that I should keep working 80 hrs a week for the next 28 yrs to pay 6k per mos on a house that may never ever ever ever see any value just because I signed a piece of paper from a mortgage company/bank that helped cause the current problems?

Oh, and my income was enough for the mortgage before the economy fell apart and i lost 80% of my income. I need that loan mod or else.

[David Kamatoy]

This is a great question by the way. I believe that Loan Modifications in certain markets go way beyond fair or unfair. Because in certan markets like the one that has posted above "$855 on a house that is now worth $400k." There is nothing fair about that it's just insane. Ultimately someone loses its just a question of who and how much.

However I also believe that Loan Modifications can work out best if the consumer hires an attorney based firm to represent them in the transaction. Get someone on your side. I suggest visiting... http://coreysbusinessblog.typepad.com/the_loan_modification_blo/

[Corey Goldstein]

Dave,

Thanks for connection. We are staying up to date with the changes in the industry and looking out for the clients rather than the banks. Seems as though they have enough help right now.

[eleanor schiano]

When are people going to understand that 100% of the subprime mortgage were not for new home purchases??? These mortgages were refinances solicited by banks to pay high credit card debt that was also solicited and quickly charged-off and sold by the bank. The borrowers were not buying too much house. Now these same banks, who defrauded the borrowers, have say in the loan modifications. When are you people going to stand up to the fraud supported by the media for the sake of investors who still want high interest mortgage payments for their retirement funds?????? Are we sleeping???????

[Jane Ritz]

I'm with Countrywide. I refinanced to pay off all of my credit card and I learned my lesson with that, but was stuck with a high intrest rate that was changing. I didnt qualify for the Hope program. I was in trouble and my husband and I didnt know what to do. We didnt want to get scammed by one of these pop-up modification companies. But we didnt know the first thing about mortgages.

We ended up using a Do-It Yourself approach that worked very nice. We used Loan Mod Assistant www.loanmodassistant.com which was only $200 and walked us through the whole process. We were able to ask questions and well it was a real pleasant experience. I especially liked it because it had a guarantee that it would work.

If anyone plans on doing a loan modification or is in trouble, I'd recommend saving your money and doing it yourself. Or if you need help like i did, using a Do-It Yourself system.

[Jared]

My wife and I bought our home during the peak and even with a large down payment are severely underwater after only being in the home less than two years. On the advice of our loan officer we took an ARM due to high interest rates for conforming 30 year loans. We were told we could refinance after one year to traditional 30 year loan. Then the market crashed and we could not refinance. Our loan is not due to reset for several years and we are current, however we fear the possibility of future hyperinflation and are desperately trying to conform to a 30 year fixed.

I have contacted Freddie Mac, the securer of my loan for instruction. I was told that I would qualify for the president’s new hope for Making Home Affordability Plan. I also checked the making homes affordable website. Freddie Mac instructed me to contact my lender Country Wide now Bank of America. I was told they have tools such as loan modification as well as interest rate reduction that would allow me to fall within the 105% loan to value target. We have interest only conventional loans and both are from Freddie Mac. One of our loan is suppose to reset in 4 years and the other one resets in 7 years ballooning to a higher interest.

Bank of America refused I was then told to call hope for home owners. After spending many agonizing hours, days, and weeks with Bank of America they informed me that we don’t qualify for their Making Home Affordability and there are no programs that qualifies us to modify our loan. Then they sent me to home retention. Home retention stated that they were not helping anyone who was "current" on their mortgage. If I wanted help I had to stop paying on my mortgage. This was suggested by at least 3 different people at Bank of America!!!

I then turned to HOPE, I am currently enrolled in the services of MMI (money management international). They sent an outreach to Bank of America (Countrywide) on April 3rd. Bank of America has denied receiving as of April 23rd. I am now contacting both Freddie Mac and MMI again.

My wife and I recently attended the Making Home Affordability HUD Counselor Workshop Seminar. The Hud counselor went through our finances and told us that we are qualified for the Making Home Affordable Plan and the Bank should offer us this plan. We then called Bank of America again asking for all the right words based on the HUD counselor had instructed us to do. Bank of America denied us to be qualified for the plan again! The Customer Service on the other end of the line was so rude and will not work with us; she said there are no plans that fit our situation.

The counselor informed us that Bank of America are denying people and pretending that they don’t have such plan in their system to offer to the customer; because the bank are so backed up and they are forcing people to foreclose in their home. So then people would not have a choice but to take the banks offer which is not in the Obama’s Plan.

My loan to value is about 118% due to all the foreclosures in my neighborhood. After checking around many of the homes that have foreclosed have been so called no doc loans by institutions similar to Bank of America (Countrywide).

My own experience with this institution has been negative to say the least. I have been passed on, lied to, and have been given questionable advise by nearly every agent (not pay your mortgage to qualify?). Bank of America has taken several billion dollars in TARP money. Unless the current laws are changed or more pressure is put upon this institution the foreclosures will continue. People like me who are current on their mortgages will soon decide if holding on to a property that may never recover may not be worth it. I am the kind of person a bank should want to keep but now must make a financial calculation. Whether or not to take the hit on my credit now or later.

Countrywide/Bank of America is an institution that cannot recover with all of its bad loans. As painful as this may, nationalization of Bank of America may be necessary. Temporary wiping out all the share holders maybe the best hope for people facing the foreclosure and will force the bank to comply with Obama’s Plan.

With the current leadership structure at this institution and the amounts of bad debt on their books they cannot be trusted to follow suggested policy now, or in the future. Bank of America the poster child for bad no doc loans.

The president must hold this institution to task and if they refuse, force the issue.